Pension funds warned of prospect of rising inflation over coming years

Pension funds and other institutional investors are being warned of the risks of a “burst of inflation” over the coming years, which is now more likely, according to Nuveen, due to current monetary policies as a result of the pandemic.

It is not the first time that rising inflation has been highlighted as a risk to schemes; in September European Pensions reported on AXA Investment Managers urging pension schemes to look at increasing their inflation hedging before a “big inflation shock” hits the markets.

Nuveen’s latest report, Global Investment Committee Outlook 2021: Dark tunnel, bright light, stated that central banks are intent on keeping rates low, and the likelihood of worryingly high inflation is minimal in 2021, although it anticipates inflation could start to rise beyond that. It added that real assets can be a “valuable inflation hedge” if inflation becomes more of an issue in the coming years.

Commenting on the report, Teachers Insurance and Annuity Association of America (TIAA) General Account, CIO, Nick Liolis, said: “For years, investors of all stripes, from the world’s largest institutions to individuals, have focused on the risk of persistently low interest rates and the struggle to achieve income. But there’s another potential risk on the horizon — with similarly damaging effects — that also demands focus: prospects for rising inflation and the erosion of purchasing power.”

Inflation risks have been a point of discussion among investors for some time, yet they haven’t materialised. However, Nuveen’s Global Investment Committee believes that the extraordinarily easy monetary policy and expansive fiscal policy seen over the past year, and more spending to come, will likely increase inflation risks.

“We don’t expect inflation to rise tomorrow. But when virtually every global policymaker is using every tool available (with more force than during the global financial crisis) to accelerate economic activity, the probability of significant inflation risk is rising. Inflation affects all investors, but the problem can be particularly acute for the TIAA General Account (GA) and other institutions that are ultimately responsible for helping people fund their retirement,” Liolis stated.

He recommends that investors should play to their strengths to manage such risks, including inflation.

“For the GA, two of our main strengths are our capital strength and ample current liquidity. Regular stress tests ensure our portfolio has more than enough liquidity to meet our spending needs, which allows us to invest a significant percentage of our overall assets into more illiquid private investments such as real estate and a variety of real assets including agriculture, timber, farmland and infrastructure. These investments have the dual advantage of providing solid yields in today’s low inflation environment while also offering the potential of a natural inflation hedge.


“Other investors will of course have varying strengths and risk tolerances. Traditional pension plans or individuals with less investment restrictions and higher risk tolerances often consider public equities or commodities to manage their inflation risks. Large institutional investors willing to invest globally could also benefit from the various rate differentials created by differing inflation expectations between countries around the world.”

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